Torsten Asmus
Summary data and analysis
A summary of the key data and analysis for this month’s CPI report is presented in Figure 1.
Figure 1: Change, Acceleration, Expectations and Surprise
All Articles & Core CPI (BLS, Investor Acumen)
CPI for all items was delayed on a MoM basis and was softer than expected. Core CPI has slowed slightly from the previous month and was slightly weaker than expected.
Analysis of core and non-core plus key sub-components
In Figure 2, we break down the analysis of CPI change and acceleration into non-core and core components. We also analyze two major sub-components of non-core CPI and three major sub-components of core CPI. While all five columns in the table contain important information, we encourage readers to pay particular attention to the right-most column (Cumulative Acceleration Contribution) as it shows exactly what was driving the MoM acceleration/deceleration in the CPI during the stream has month compared to the previous month.
Figure 2: Analysis of the main aggregated components of the CPI
Aggregated CPI Component Analysis (BLS, Investor Acumen)
As can be seen in the table above, Energy slowed down significantly, accounting for most of the overall slowdown in All Items CPI.
Non-housing core services — the indicator the Fed is currently paying most attention to — slowed significantly. This is perhaps the most important point in this report.
We now proceed to analyze the CPI report in more detail. For more detailed information on how to read and interpret the tables and graphs in this article, see the Seeking Alpha blog post below.
Contributions to the monthly change in core CPI
In Figure 3, we provide a bar chart that highlights the main positive and negative contributors to the percentage change in MoM in core CPI. These contributions consider both the magnitude of the MoM change in each component and the weight of each component in the CPI.
Figure 3: Key contributors to month-on-month percentage change
Top CPI Contribution Numbers (BLS, Investor Acumen)
Owner-equivalent rent and primary residence rent were the main positive contributors to the monthly CPI change.
The monthly CPI change was dragged down by used car prices and health insurance. Both tend to be volatile components.
It should be noted that real-time indicators are pointing to significant disinflation in the housing components of the CPI later this year.
Contributions to Monthly Acceleration in Core CPI
In Figure 4, we provide a bar chart highlighting the key positive and negative contributors to MoM acceleration in Core CPI. These contributions take into account both the magnitude of the MoM accelerations in the components and the weight of each component in CPI.
Figure 4: The main contributors to MoM acceleration
Top CPI Acceleration Contributors (BLS, Investor Acumen)
It is worth reviewing this table carefully as it likely includes most or all of the elements that caused the Core CPI to diverge from forecasters’ expectations.
The most notable changes from last month to this month were the sharp acceleration in used car prices (although still a negative contributor to core CPI) and the sharp deceleration in owner-equivalent rent and primary residence rent (although still positive contributions to core CPI ). .
top mover
For general interest, we highlight in Figure 5 the CPI components (highest granularity) that showed the largest positive and negative changes over the month. The year-on-year change in these particular components is shown to the right.
Figure 5: Percent change in top movers month-on-month
Top CPI Mover (BLS, Investor Acumen)
Eggs are continuing the recent deflationary trend after facing several months of significant inflationary pressures earlier this year. In March, men’s pants and shorts and women’s outerwear saw the biggest price increases.
Implications for the economic outlook
The somewhat weak reads in the March CPI report will give some relief to the Fed and give it more leeway on when to pause rate hikes. The markets are currently assuming that they will raise the Fed’s interest rate again in May and then pause.
From the Fed’s perspective, the most encouraging number in this report was Core Services ex-residents, which slowed to 0.29% this month from 0.43% last month. Should this trend continue, it would certainly allow the Fed to pause rate hikes after the May meeting.
If the Fed manages to pause rate hikes after the May meeting, it will remove significant uncertainty from the economy and increase the likelihood of a soft landing. However, should inflation recover in the next few months, uncertainty would rise again and upward pressure on interest rates would increase again.
Upside surprises in energy prices are the main risks to the future inflation outlook. Energy prices put strong downward pressure on the overall CPI this month. However, energy prices may have bottomed out and if energy prices rise from current levels in the future, they could start to put upward pressure on inflation, including core inflation.
Effects on the financial markets
Following the release of the March CPI report, US Treasury yields reacted strongly to the downside, with the 2-year Treasury yield falling 12 basis points to 3.93%. S&P 500 futures are up about 0.50%. Fed funds futures are pricing in a 69% probability of a 25 basis point rate hike in May, down only slightly from yesterday’s 70%.
Sentiment on US stocks is on the up after a sharp run down a few weeks ago. Positioning in the US equity market was very bearish. Therefore, the resistance path for US stocks is currently higher due to these two factors. The relatively soft March CPI report should allow the S&P 500 Index to test key multi-week resistance around 4200. Indeed, after significant uncertainty was lifted from the market on the release of the jobs and CPI reports, longer-term resistance at 4330 could even come into play in the coming weeks.
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